3 Big Ways for Small Businesses to Increase Cash Flow

Even if you’re an accountant, managing cash flow is no picnic.  Good cash flow management – basically just keeping your money as long as possible and being able to predict how much of it is headed into and out of your pocketbook at any given time – accomplishes a few goals.  It’s great for keeping your business in good financial standing and for forecasting, and, much as it might pain you to think about it, getting a good feel for how it all works will be very helpful to you.  Rather than fret about it, let’s just jump right in – you’ll have a good time, and we won’t go too far off the deep end.

#1: Projection is Key

Projection is the essence of cash flow management.  Knowing how much cash you’re going to have at any given time (or even one specific upcoming time) is smart because that information will allow you to make other business decisions – and, of course, plan for the future.  Were you considering upgrading that expensive piece of machinery in your factory?  How about exploring different vendors for one of your products?  Maybe you’re even planning to give your employees raises and aren’t sure if it’s feasible.  Using numbers prepared by an accountant will serve you decently, but, if you run the numbers yourself, you’ll have to learn to predict cash flow as well.  You’ll need to make educated guesses about a few different things, including the likelihood your customers will pay you on time and your upcoming expenses.

In two dense steps, here’s what you can do:

1. Add up all your cash on hand, including the cash you expect to get from other sources later on. In order to get an accurate reading, you’ll need to consult your Sales team (preferably the entire team) as well as your Customer Service team or your Support team – and, your Credit or Finance department, of course.  Ask all of these people the same basic question: How much money (in all of its various forms) is the company going to receive, and when?  For your Sales team, this may mean asking about the profitability of items or services sold; for your Quickbooks merchant services team, this will mean inquiring about customer payments.
2. Evaluate when your money will be spent, and on what. The more details you have, the better off you’ll be – and that includes breakdowns of rent, utilities, salaries, benefits, office supplies, advertising… and, anything else you might spend money on.

If you’re very meticulous and honest with your work on cash flow projection, it’s all you’ll need to do.  Taking in and breaking down so much information is a daunting task, certainly, but, if you prepare one of these cash flow predictions per quarter (give or take, depending on your need), you’ll know precisely how much wiggle room you have to make other adjustments.  Like that piece of machinery, or those raises.

#2a: Speed up Receivables

Obviously, if you got paid for things the minute you invoiced your customers, cash flow would never be a problem.  That’s simply not how it works in the majority of cases, though.  With that in mind, there are certain ways to ensure you get your cash flow goes a little more smoothly; you can start by adjusting things at the inventory level and making other tweaks at the customer level.

Take these tips, for example:

1. Try to get rid of old inventory – don’t just keep it around. If this means selling older stock for less, go for it.  It’s better than not making a dime and waiting for a big sale that isn’t guaranteed.
2. Invoice customers as soon as possible. Follow up quickly if you sense any resistance or slowness.
3. Use an automated payment system if possible. Whether this means using an integrated credit card processing system or a recurring payments program, this will quicken your cash flow and put more money into your bank account.  If you do use an integrated credit card processing system or a virtual payment gateway, you’ll end up saving time each day as well, which can mean more money back in your pocket in the form of more productivity (and thus fewer wages paid out for the same amount of work).
4. Ask for customers to make payment deposits on orders as soon as the orders are taken. Identify customers who have a history of sluggishness and institute a COD (collect on delivery) policy for them.  (You can make notes in your CRM program for these particular customers.)  If you aren’t familiar with COD, an outside service like UPS can handle it.  If all that doesn’t get you your money more quickly, simply refuse to do business with those customers unless you can be certain you’ll be paid.  It isn’t worth it to expend resources for no return.
5. Reward customers for on-time or early payments by offering slight discounts.

For a more in-depth look at speeding up receivables cash flow, this article on avoiding late payments from clients touches on some similar ground and offers additional details and tips as well.

#2b: Streamline Your Payables

If your sales are on target, you may be inclined to think that means your business is in tip-top shape.  Unfortunately, there’s usually much more to consider than just that when it comes to cash flow management.  Great sales can mask problems that come from expenses, so it’s advisable to pay attention to how much of your money leaves your wallet and when.

Here are a few things you can do to keep money in your wallet for longer:

1. If you’re on terms with a vendor yourself, take advantage of those terms and don’t pay off your balance until it’s absolutely necessary.
2. If your vendors offer you a discount for an early payment, consider whether that discount is worth as much as keeping your money for longer, even if it means making the payment the day it’s due and losing the potential discount.
3. Sending payments in the mail means you part with your money sooner. Instead of this, send payments electronically on the day they’re due so you keep your funds for longer.
4. Don’t do business solely on the basis of price. Vendors who will accommodate your financial situation by placing you on terms are more valuable to you than those who offer lower prices but need your money this minute.

If it’s necessary, you can even let your vendors know about your cash flow situation.  If you ever need to make a late payment, you will at least have given your vendor(s) prior notice, and they may be more sympathetic to your situation than they would be if you had simply put off making a payment or let them know at the eleventh hour that you couldn’t pay.

 

 #3: Overcome Real Problems

While tip 2 is collectively designed to help prevent cash shortages, sometimes the best intentions aren’t good enough, and, sometimes the cash flow projection strategy (like in tip 1) doesn’t accurately predict your situation.  It’s important to realize that having a deficit doesn’t mean you’ve failed as a business owner or that you’re a bad person – it just means you couldn’t predict the future, and, until humans develop a sixth sense, you’re granted a little leeway for that one.  Not being able to pay a bill is completely normal; however, there are a few other things you can do to help lessen the strain from something like this.

Here are a few ideas:

1. Ask for a loan. Remember, though: Banks will be much more apt to help you and lend you money if you give them a bit of warning – even months in advance.  If you come to a bank with an urgent cash flow problem and a request for money, you probably won’t get very far.  (You can approach third party companies about loans, but your interest rates will likely be much higher to make up for the convenience, so try to be pragmatic if possible.)
2. Apply for a line of credit. Your bank can offer you more than just loans; a line of credit will allow your business to borrow money up to a certain limit, just like a credit card.  Even if you don’t end up utilizing this line of credit, it’s good to have in case of an emergency cash flow situation.
3. If your bank won’t come through for you, you can ask your vendors for help. Your vendors and suppliers will probably understand you and your business a little better than your bank does, and you may be able to obtain what’s basically a low-cost loan from your vendors if you simply ask for one nicely.  This is especially true if you’ve been in good standing with them for a while.
4. Barring any help from your bank or your vendors, you can try using an invoice factoring service. This transfers your invoices to another company that essentially purchases your outstanding debt and attempts to collect the unpaid money themselves.  The downside is you don’t get the full face value of your invoices – this is the price of using the factoring company – but, the upside is you get paid right away, so consider this option carefully.
5. Ask your best customers to pay you more quickly. Take care to explain your cash flow situation earnestly to them, and incentivize them by giving a slight, one-time discount.  You can try this with your other customers too, but go through your proven ones first, since they will probably be easier for you to contact.
6. In very extreme situations, you can sell certain machinery or offer furniture or similar expendable assets as security on a loan. If you go this route, it’s of utmost importance that you make your payments on time, or you may risk losing the items you handed over.

Parting Thoughts on Cash Flow Management

Perhaps it was a bit of a lie to say discussing cash flow is a fun subject.  It isn’t too great unless you’re unequivocally in the black – and, even at that, you’ll need to keep gathering information and running predictions to ensure you remain there.  If you follow some of the steps here, however, you should be armed with some good information that will help you overcome future problems.